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Former Executives of Comverse Technology Inc. Charged with Backdating Millions of Stock Options and Creating a Secret Stock Options Slush Fund

Former CEO, CFO and General Counsel Charged with Fraudulently Reaping Millions in Profits
$45 Million Seized in U.S. Accounts

WASHINGTON – Three former executives of Comverse Technology Inc. (“Comverse”), a publicly-held computer software company, were charged today for their roles in orchestrating a long-running scheme to manipulate the grant of millions of Comverse stock options to themselves and to employees, the Department of Justice announced today. Former Chief Executive Officer Jacob “Kobi” Alexander, former Chief Financial Officer David Kreinberg, and former General Counsel William F. Sorin allegedly orchestrated the scheme by fraudulently backdating the options and operating a secret stock options slush fund.

The charges were announced by Deputy Attorney General Paul J. McNulty and Director of the Division of Enforcement Linda Thomsen of the Securities and Exchange Commission (SEC), joined by U.S. Attorney Roslynn R. Mauskopf of the Eastern District of New York and Acting Assistant Director James “Chip” Burrus of the FBI. The charges stem from a coordinated investigation led by the Department of Justice’s Corporate Fraud Task Force. Alexander, Krienberg and Sorin, all of whom resigned from Comverse on May 1, 2006, in the midst of an internal company investigation relating to options backdating, have been charged by criminal complaint filed in the Eastern District of New York with conspiracy to commit securities fraud, mail fraud and wire fraud. According to the complaint, between 1998 and 2002, the defendants reaped millions of dollars in profits as a result of their scheme and issued false and misleading financial statements to the company’s shareholders and the investing public regarding the true value of the options grants.

“The Justice Department is determined to see that our markets operate fairly and honestly,” said Deputy Attorney General McNulty. “Investors take risks and do their best to see into the future when picking companies in which to invest. We cannot allow corporate leaders to operate under different rules, using 20-20 hindsight to line their own pockets. We will continue to pursue misconduct in any boardroom where we find it.” In two related actions, the government seized over $45 million from two investment accounts held in the United States in Alexander’s name based on his alleged participation in a stock options fraud and a money laundering scheme involving the secret transfer of more than $57 million to accounts in Israel in an effort to conceal the funds from U.S. authorities. In addition, the SEC commenced a civil fraud and injunctive case against all three defendants for their roles in causing Comverse to publicly file false annual and quarterly financial reports and proxy statements from 1991 through 2005.

Initial appearances for Kreinberg and Sorin are scheduled for this afternoon before U.S. Magistrate Judge Viktor Pohorelsky in Brooklyn, N.Y. An arrest warrant has been issued for Alexander.

“As alleged in the complaint, the defendants abused their positions in order to enrich themselves and favored employees at the expense of the investing public,” stated U.S. Attorney Mauskopf. “By backdating these options, the defendants, in effect, gave themselves and others an opportunity to place a bet in the middle of a race -- a bet that paid off handsomely.”

“The alleged scheme of these defendants in back-dating options victimized both Comverse shareholders and the American people,” said Assistant Director Burrus of the FBI. “Their alleged fraud affected the company’s bottom line by deliberately misstating earnings, a material misrepresentation to shareholders.”

As alleged in the complaint, from 1998 through 2001, Comverse adopted stock option plans designed to provide additional compensation for executives, including the defendants, and other employees. In the company’s proxy statements and other public filings, the defendants represented that the options would be priced at “fair market value” on the date the options were granted. According to the public filings, the pricing of the stock options under the plans would serve shareholder interests because executives and employees who received the options would continue to work diligently to promote the success of the company and thereby contribute to a rise in the stock price. However, as alleged in the complaint, Alexander, Kreinberg and Sorin fraudulently backdated the options awarded under each of these stock option plans to days when the stock was trading at periodic low points. As a result, the options were granted below fair market value, that is, below the trading price on the date the options were actually granted. For example, in 1999 the defendants set the option price $35 a share below the fair market value on the day the options were actually granted. Alexander allegedly took for himself more than 300,000 of those backdated options, for a paper profit of over $11 million.

The grant of options below fair market value carries significant disclosure, accounting and tax consequences. For example, the value of such options must be recorded as a compensation expense against the company’s revenue and therefore, can significantly reduce the company’s reported earnings. In addition, the grant of such options must be disclosed to the shareholders because these options: (1) erode the incentives of executives and employees to work for the future of the company because such options are at least in part a bonus for past service; (2) impose a cost on the company because the company is committed to selling its stock at a discounted price; and (3) reduce the earnings of the company.

As alleged in the complaint, the defendants fraudulently circumvented these accounting and disclosure rules by secretly backdating the grant documents and by issuing false proxy statements and periodic public filings misrepresenting that Comverse’s stock options were granted at fair market value.

In addition to the backdating scheme, the complaint also alleges that Alexander and Kreinberg generated hundreds of thousands of backdated options, which they parked in a secret slush fund to be used at Alexander’s sole discretion to benefit favored employees. To create the slush fund, Alexander and Kreinberg inserted dozens of fictitious names into the list of option recipients submitted to the Compensation Committee of the Board of Directors. Once the Committee approved these options, Alexander and Kreinberg deposited the options in an account aptly named “Phantom” (later re-named “Fargo”).

According to the complaint, on two occasions in 2000, Alexander transferred a total of approximately 88,000 options from the slush fund to another top executive. Although the options had a four-year vesting period, on each occasion, Alexander made the options immediately exercisable. The executive exercised the options the day after receiving them, when the stock was trading at nearly double the strike price, and sold the stock at a profit of $4 million. The defendants’ alleged scheme came to light in early March 2006, when a reporter from the Wall Street Journal called Comverse and inquired about the unusual pattern in the timing of the company’s stock option grants. In response, the defendants attempted to cover up their scheme by authorizing false statements to be made to the reporter, and by lying to an in-house lawyer for Comverse and to the company’s outside auditor. Additionally, Kreinberg logged onto Comverse’s computer and attempted to alter a database to hide the slush fund’s existence.

The charges in the complaint are merely allegations, and the defendants are innocent unless and until proven guilty. The government’s case is being prosecuted by Assistant U.S. Attorneys Ilene Jaroslaw, Linda Lacewell, Sean Casey and Kathleen Nandan. The investigation was led by the FBI New York Field Office.